How to Calculate Profit Margin: The Metric that Matters

Metrics may be the single biggest source of stress for anyone who’s building a business. When the numbers are good, you feel on top of the world. When they’re bad, you’re in the deepest pits and second guessing everything you know.

On top of that, when you’re not trying to even out the huge up’s and down’s, you’re left staring at your screen wondering what any of the numbers even mean and franticly trying to figure out if you’re calculating them correctly or if you’re missing out on some crucial numbers entirely!

So, let’s bring some clarity to this. We’ll nail down what numbers you should pay attention to, how to run your business more efficient, and ultimately how to make more money.

Profit: The metric that matters

In business, regardless of industry, there are a near infinite number of metrics. All of which someone on the Internet says is “the most important number”. LTV, Churn, CAC, CPC, ACV, ARPU, ARR, COGS, ABC, XYZ (okay, those last two are made up…maybe?).

So, what actually matters? One word: profit. Everything else is a distraction.

Why profit matters

Why is “profit” the only metric that matters? Because it’s an enabler. It enables you to do things outside of the constraints of time. It enables you to automate and grow, freeing you up to work on whatever you’d like.

The less profit you have, the more constrained you are by your time to produce.

For example, say you’re producing a podcast. You’re amazing at interviewing people, but you hate the editing process. If you have profit, you can spend some of it to outsource the editing process and free yourself up to do even more interviews.

Or maybe you’re working on a book. You can pump out content all day long, but editing that down into something more concise is such a slog. Profit allows you to hire an editor to really take your book to the next level, making your book more valuable.

Why the other metrics are a distraction

When you read any article on growth, they throw around all sorts of acronyms that you “must” improve. And while improving a given metric isn’t inherently a bad thing, it’s just usually a really inefficient way to use your time. There are almost always bigger fish to fry.

Take landing page conversion rates. You’ve likely spent inordinate amounts of times trying out different landing page designs, changing what information you do/don’t ask for, tweaking the copy on the page incessantly, all to try to move the needle a couple of percentage points.

Is increasing your form conversion rate from 3% to 5% bad? Of course not! But what if instead of spending all of that time optimizing your conversion rate you instead produced new content that brought in new customers? Or you spend that time having conversations with your current customers to learn how you can create more value for them? That is almost certainly a better use of your time.

Numbers should be an indicator– a “status update” of sorts– on how your business is doing so you can keep an eye on how you’re doing, but they shouldn’t be something you obsess over every minute of the day.

How to calculate profit

If profit is the metric that matters, how do you figure out if you’re making any? You need to know two things: revenue and expenses.

Revenue is simply the money coming in while expenses are the money going out. As long as you’ve got more money coming in (revenue) than money going out (expenses) then you’ll always have profit!

How-to:

The most simple way to do this is to write all your expenses down in one column and your revenue down in another, then subtract the expenses from the revenue. If that number is positive, you’re off to a great start!

This all sounds simple enough, but the reason most people can’t make their business work is because they can’t figure out how to keep revenue coming in at a greater pace than the money going out.

It’s easy to say “keep expenses down!”, but in practice that’s much harder because your biggest expense is likely you. Yes, your own salary is an expense. So, while keeping all of your expenses down and cutting out extraneous spending is wise, you aren’t going to magically make your business really successful simply by cutting expenses. You need to increase profit.

An example scenario

When figuring out what to do next, what products to launch, how to price things and all the other stuff that comes with building a business, it’s important to pinpoint where you want to be.

Let’s say your goal is to pay yourself $10,000 per month. (We’ll leave out taxes for the sake of simplicity given tax rates vary so much around the world.)

You can’t just say “I need to sell my $100 course to 100 people each month” and call it a day. You’ve got many other things you need to account for.

Maybe your list of expenses looks something like this (some of these are normalized to monthly increments)…

If we add all of those up, we’re actually closer to $15,000 a month in expenses, 50% more than what we thought we originally needed!

Now, instead of selling your $100 course to 100 people every month, you need to sell it to 150 people just to break even. What about when you have a down month? Which you will. Your salary will take a hit, which trickles down to making it harder to pay your own bills, which then starts a pretty nasty cycle that actually pushes most people out of entrepreneurship.

Yes, you could cut some of those expenses, and that may help temporarily, but long- term you need to increase profit.

Profit is what helps you absorb the inevitable ups and downs of running a business. Maybe next month you’re only able to sell your course to 50 people. If you’ve had a few months of profit, then that won’t matter at all and you’ll still be able to maintain your salary and pay your expenses because that profit gave you saving to pull from.

How to calculate profit margin

While profit is important to understand, you might also want to know what your profit margin is. Your profit margin is the percentage of your gross revenue that represents your profit. This number is important to know because it shows how much your business keeps in from every dollar of every sale you make.

Unlike the verbatim dollar to dollar measurement you get with profit, profit margin shows you the percentage of your take-home– a much easier measurement to see overarching trends over time.

How to:

To find out your profit margins, you’ll need to know your Cost of Goods Sold (COGS) and your revenue. Then just simply plug those numbers into the equation below and you’ve got your profit margin!

(Revenue – COGS) / Revenue X 100= Profit margin

Keep track of your profit

How you increase profit varies greatly between businesses. The bigger takeaway here is that you absolutely must track your revenue and expenses on at least a monthly basis. Doing so will not only reduce stress but also help you set concrete goals on exactly what steps you need to take next to grow your business!

Want a quick way to track your revenue and expenses? To claim your copy of the Profit Tracker spreadsheet, click the button below and head to File » Make a Copy to save your own editable template.

Download Profit Tracker

Josh Pigford is the Founder and CEO of Baremetrics, which provides revenue analytics and insights to businesses of all sizes. He writes and shares more than he should on topics like growth, transparency, startups, marketing and psychology. 15 years in, he’s still winging it.